The U.S. Supreme Court agreed to use a case involving Fifth Third Bancorp (FITB) to decide how easy it will be for workers to sue when their retirement plans lose money because of a drop in the employer’s stock price.
The justices today said they will hear an appeal from Fifth Third, a Cincinnati-based lender whose shares plunged more than 97 percent from July 2007 to February 2009 as it posted losses stemming from bad loans.
Fifth Third is fighting a lawsuit filed by workers who owned company stock in their retirement plans and say the lender failed to protect them from losses. They accuse Fifth Third and Chief Executive Officer Kevin Kabat of artificially inflating the stock price in 2007 by hiding the riskiness of the company’s loan portfolio.
The court will address issues that have arisen repeatedly in the fallout from the subprime loan crisis. The high court previously declined to hear similar cases involving Citigroup Inc. (C), McGraw-Hill Cos. (MHFI) and JPMorgan & Chase & Co. (JPM) McGraw-Hill changed its name to McGraw Hill Financial Inc. this year.
Like many 401(k) plans, the Fifth Third plan gave workers a menu of investment options, including one that consisted almost entirely of the company’s own stock. The workers say plan administrators should have stopped offering Fifth Third stock as an investment option.
Fifth Third contends that lawsuits are permissible only if the company was in a “dire situation” and plan administrators did nothing to shield stock-owning employees. The case turns on the U.S. Employee Retirement Income Security Act.
Ruling in the Fifth Third case, a federal appeals court in Cincinnati said the workers needed only to meet a lower standard by claiming that a “reasonable” administrator would have acted differently. Federal appeals courts are divided, and most that considered the issue have applied the tougher standard.
The Obama administration told the justices that even the Cincinnati court was applying too demanding a standard by starting its analysis with the presumption that the plan administrators acted prudently.
The administration’s position would mark a change in the law in much of the country. Every federal appeals court to consider the issue has said plan administrators are entitled to that sort of presumption.
The case, which the court will resolve by July, is Fifth Third v. Dudenhoeffer, 12-751.
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